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Derivative Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into derivative financial instruments, including interest rate lock commitments issued to residential loan customers for loans that will be held for sale, forward sales commitments to sell residential mortgage loans to investors, and interest rate swaps with customers and other third parties. See “Note 11: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives.

To secure its obligations under derivative contracts, the Company pledged cash and held collateral as follows (dollars in thousands):

			As of
			March 31, 2023						December 31, 2022
Cash pledged to secure obligations under derivative contracts			$	37,827					$	38,609
Collateral held to secure obligations under derivative contracts			22,650						29,830

Derivative Instruments Designated as Hedges

The Company entered into derivative instruments designated as cash flow hedges. For a derivative instrument that is designated and qualifies as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.

Interest Rate Swaps Designated as Cash Flow Hedges

Interest rate swaps with notional amounts totaling $350.0 million as of both March 31, 2023, and December 31, 2022, were designated as cash flow hedges. The Company entered into one $50.0 million interest rate swap to hedge the risks of variability in cash flows for future interest payments attributable to changes in the contractually specified 3-month LIBOR benchmark interest rate on the Company’s junior subordinated debt owed to unconsolidated trusts (Debt Swap). In addition, the Company entered into one $300.0 million receive fixed pay floating interest rate swap to reduce the Company’s asset sensitivity (Loan Swap). Duration was added to our loan portfolio by fixing a portion of floating prime based loans. Interest rates had risen above their historical lows allowing the Company to lock in a portion of its loan portfolio to reduce asset sensitivity while creating a more stable margin in a volatile rate market. These hedges were determined to be highly effective during the period, and the Company expects its hedges to remain highly effective during the remaining terms of the swaps. Changes in fair value were recorded net of tax in OCI.

A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):

									As of
			Location						March 31, 2023						December 31, 2022
Debt Swap
Notional amount									$	50,000					$	50,000
Weighted average fixed pay rates									1.79		%				1.79		%
Weighted average variable 3-month LIBOR receive rates									4.87		%				4.77		%
Weighted average maturity, in years									1.46 years						1.71 years
Loan Swap
Notional amount									$	300,000					$	300,000
Weighted average fixed receive rates									4.81		%				4.81		%
Weighted average variable Prime pay rates									7.85		%				7.32		%
Weighted average maturity, in years									5.85 years						6.10 years
Gross aggregate fair value of the swaps
Gross aggregate fair value of swap assets			Other assets						$	2,062					$	2,535
Gross aggregate fair value of swap liabilities			Other liabilities						25,970						32,367
Balances carried in AOCI
Unrealized gains (losses) on cash flow hedges, net of tax			AOCI						$	(16,642)					$	(20,985)

The Company expects to reclassify unrealized gains and losses from OCI to interest income and interest expense as shown in the following table, during the next 12 months (dollars in thousands). Amounts actually recognized could differ from these expectations due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31, 2023.

			As of March 31, 2023
Unrealized gains (losses) in OCI expected to be recognized in income
Unrealized gains expected to be reclassified from OCI to interest income			$	393
Unrealized losses expected to be reclassified from OCI to interest expense			(783)
Net unrealized gains (losses) in OCI expected to be recognized in net interest income			$	(390)

Interest expense recorded on these swap transactions was as follows for the periods presented (dollars in thousands):

									Three Months Ended March 31,
															2023						2022
Interest on swap transactions
Interest income on swap transactions															$	383					$	685
Interest expense on swap transactions															(2,192)						(185)
Net interest income (expense) on swap transactions															$	(1,809)					$	500

The following table reflects the net gains (losses) relating to cash flow derivative instruments that were recorded in AOCI and the unaudited Consolidated Statements of Income during the periods presented (dollars in thousands):

									Three Months Ended March 31,
															2023						2022
Unrealized gains (losses) on cash flow hedges
Net gain (loss) recognized in OCI, net of tax															$	3,050					$	(4,845)
(Gain) loss reclassified from OCI to interest income, net of tax															(274)						(489)
(Gain) loss reclassified from OCI to interest expense, net of tax															1,567						132
Net change in unrealized gains (losses) on cash flow hedges, net of tax															$	4,343					$	(5,202)

Derivative Instruments Not Designated as Hedges

Interest Rate Swaps Not Designated as Hedges

The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into equal and offsetting derivative agreements with a third-party dealer. These contracts support variable rate, commercial loan relationships totaling $648.3 million and as of March 31, 2023, and $576.9 million as of December 31, 2022. These derivatives generally worked together as an economic interest rate hedge, but the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Amounts and fair values of derivative assets and liabilities related to customer interest rate swaps recorded in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):

			As of March 31, 2023
			Derivative Asset												Derivative Liability
			Notional Amount						Fair Value						Notional Amount						Fair Value
Derivatives not designated as hedging instruments
Interest rate swaps – pay floating, receive fixed			$	161,772					$	2,256					$	486,488					$	30,226
Interest rate swaps – pay fixed, receive floating			486,488						30,226						161,772						2,256
Total derivatives not designated as hedging instruments			$	648,260					$	32,482					$	648,260					$	32,482

			As of December 31, 2022
			Derivative Asset												Derivative Liability
			Notional Amount						Fair Value						Notional Amount						Fair Value
Derivatives not designated as hedging instruments
Interest rate swaps – pay floating, receive fixed			$	48,728					$	370					$	528,183					$	39,685
Interest rate swaps – pay fixed, receive floating			528,183						39,685						48,728						370
Total derivatives not designated as hedging instruments			$	576,911					$	40,055					$	576,911					$	40,055

Changes in fair value of these derivative assets and liabilities are recorded in noninterest expense in the unaudited Consolidated Statements of Income and summarized as follows (dollars in thousands):

															Three Months Ended March 31,
			Location																		2023						2022
Interest rate swaps
Pay floating, receive fixed			Noninterest expense																		$	(7,667)					$	(3,550)
Pay fixed, receive floating			Noninterest expense																		7,667						3,550
Net change in fair value of interest rate swaps																					$	—					$	—

Risk Participation Agreements

To manage the credit risk exposure related to a customer-facing swap, the Company entered into risk participation agreements in conjunction with loan participation arrangements with other financial institutions. The risk participation agreements mature between 2026 and 2029, and are summarized as follows (dollars in thousands):

			As of
			March 31, 2023						December 31, 2022
Risk participation agreements
Number of risk participation agreements			3						2
Notional amount			$	34,320					$	18,899
Fair value			24						5

Mortgage Banking Derivatives

Interest Rate Lock Commitments

Interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815 “Derivatives and Hedging” are carried at their fair values in other assets or other liabilities in the unaudited Consolidated Balance Sheets, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Forward Sales Commitments

The Company economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815 “Derivatives and Hedging” are carried at their fair values in other assets or other liabilities in the Consolidated Balance Sheets. While such forward sales commitments generally served as an economic hedge to mortgage loans held for sale and interest rate lock commitments, the Company did not designate them for hedge accounting treatment. Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Amounts and fair values of mortgage banking derivatives included in the unaudited Consolidated Balance Sheets are summarized as follows (dollars in thousands):

									As of March 31, 2023												As of December 31, 2022
			Location						Notional Amount						Fair Value						Notional Amount						Fair Value
Derivatives with positive fair value
Interest rate lock commitments			Other assets						$	2,955					$	53					$	1,517					$	16
Forward sales commitments			Other assets						697						3						83						1
Mortgage banking derivatives recorded in other assets									$	3,652					$	56					$	1,600					$	17
Derivatives with negative fair value
Interest rate lock commitments			Other liabilities						$	36					$	—					$	83					$	1
Forward sales commitments			Other liabilities						4,983						95						2,757						39
Mortgage banking derivatives recorded in other liabilities									$	5,019					$	95					$	2,840					$	40

Net gains (losses) relating to these derivative instruments are summarized as follows for the periods presented (dollars in thousands):

															Three Months Ended March 31,
			Location																		2023						2022
Net gains (losses)
Interest rate lock commitments			Mortgage revenue																		$	37					$	15
Forward sales commitments			Mortgage revenue																		(54)						106
Net gains (losses)																					$	(17)					$	121

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- References

No definition available.

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- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-URI https://asc.fasb.org/topic&trid=2229140

Reference 2: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 40
-Section 50
-Paragraph 5
-Subparagraph (f)
-URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008

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